Seven Year Car Loans: The Game of Consumer Chicken Continues

| About: Toyota Motor (TM)

They're getting desperate out there... anything to keep this game of consumer chicken going... how sad. And Toyota (NYSE:TM) of all people leading the charge? I expected better sir... I am glad the press finally is pointing this out.

  • Automakers and buyers are diving into extra-long auto loans, and they could drown from that plunge. Toyota Motor (TM) Credit brought the loans to light when it acknowledged at a meeting last week it is making 84-month loans — seven years — to cut buyers' payments and boost sales. It's been making them since August.
  • "Definitely bad," says Kevin Tynan, auto analyst at Argus Research. Easing buying with long loans "is bubble-inducing, and the bubble's bursting."
  • A reason for the sales-chilling effect is that vehicles depreciate fast, to about half their price in three years. Most people trade in in three or four years, before a typical loan is repaid, Hines says. At 36 to 48 months into a 60-month loan the vehicle might be worth a little more than the loan balance. That can be a down payment on a new car.
  • That far into an 84-month note, the buyer still owes a lot more than the car is worth, "So that balance gets rolled into the new loan, making it virtually impossible to ever have equity in the new vehicle," Tynan says. "Down the road, and we could be there now, the consumer says, 'I have to drive this thing until it's paid for,' and there's a significant decline in (new car) demand."
I wrote about this in September [Is a 10 Year Car Mortgage Far Off?]
Some loans are even longer -- as long as eight years. According to JD Power & Associates, nearly 39% of loans made year to date had original terms of between 72 and 83 months, up from 31% in 2004. And 3.9% of loans made so far this year had original terms of at least 84 months, up from 2.4% two years earlier.

But auto loans of five, six or even eight years are risky for lenders because, unlike homes, cars and trucks depreciate rapidly. Most vehicles lose about a third of their value once they are driven off the lot. So the longer borrowers stretch out payments, the more time loans spend underwater -- a term meaning the balance is bigger than the value of the vehicle securing it.

And the longer the loan, the more likely owners will still be making payments when they want or need to buy a new car, a concept known as "negative equity." "At least one in four customers who trade in a car have negative equity," says Toprak. How much negative equity? The average is at least $3,000.


So there you have it... a nation of under water home owners, driving around in their under water cars, on 8 year term. Subprime nation. At it's best. Instead of living within our means - we keep falling into the siren call of "we deserve this", "we can do this" and "let's find a way to make this work so I can have my shiny toy". I don't blame them to some degree - many people have expected this lifestyle - to be able to afford the things they build, but that is going the way of the dodo bird [GM Offering Buyouts to 74,000 Workers]
Wave by wave, we go into this phase where people are going to be making less (GM is not eliminating these jobs - it is asking people who make good money to "retire" so they can rehire new folks at $12-$14 an hour as replacements), and then somehow must keep up with the cost of living at these lower wages (combined with inflation). So they turn to things like ... 7-8 Year Auto Loans. Again, I call this the slow erosion. It happens slowly so it's not noticeable. But it is happening.

And the corporations are not innocent either - they know this is bad long term, but anything to help in the short run. Make quarterly profits. Let CEO make his multi millions. And skewer the working class on the roast. (Hmm, I am sounding more like a Democrat every day - eek). I said this year will be the the worst for auto sales in 2 decades [Nov 27 - Home Sales Plunge, Car Sales Next] and we know where this is heading right folks? We've seen this game before... no wait, we are seeing it as we speak in our homes, yet we continue the behavior like naughty toddlers behind momma's back [Dec 6 - Next Prediction Coming True - Auto Loans Going Bad]. Some points of "reality" to mull over while we celebrate the reassuring retail figures...

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Tagged: , Auto Manufacturers - Major, Japan
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